by Ben Brown, Program Manager- Farm Management Program College of Food, Agricultural, & Environmental Sciences Department of Agricultural, Environmental, and Development Economics 2120 Fyffe Road, Columbus, OH 43210
USDA released their monthly supply and demand estimates today and similar to years past the September WASDE was an important one given its proximity to the end of harvest in the United States. This year’s September WASDE could have more influence on final yields compared to years past taking into consideration how quickly the crops are progressing. The crop progress report that came out earlier this week reported that corn completion is 2% further along than our five-year average- an adjustment from 3% to 5%. However, considering the majority of the corn production is located in the Midwest and Upper Plains, the percent of corn entering dent stage is important. USDA reports that 86% of the U.S. corn crop is in the dent stage compared to the 5-year average of 75%. For soybeans the percent of the U.S. crop dropping leaves is at 31% compared to the five-year average of 19%. Historically the October report has been the best indicator of final crop yields, but since 1964 when a crop is this far along there is significant correlation with the September yield forecasts.
As far as commodity prices received to producers, this was another WASDE to burn. However, producers will have to shake it off because while complaining about prices might make one feel better, it historically hasn’t changed the result. The yield forecast confirmed early reports by the Pro-Farmer Tour and Ohio Ag Net that this had the potential to be a record crop. The Pro-Farmer Tour had results of 177bu./acre for corn and 53bu./acre for soybeans for a national average. Ohio yields were 184 bu./ acre for corn and 60 bu./acre for soybeans. Both would be new yield records for Ohio beating previous records of 177 bu./acre for corn in 2017 and 54.5 bu./acre for soybeans in 2016. The Crop Production Report released today had an Ohio corn yield of 188 bu./acre and a Ohio soybean yield of 58 bu./acre. Multiplied by expected harvested acreage, this would be Ohio’s second largest corn crop and largest soybean crop in terms of production. Total U.S. yields were 181.3 bu./acre for corn and 52.8 bu./acre for soybeans.
Preventive plant numbers and failed acreage reports filed through USDA have to this point been lower than the 5-year average. It is likely that the harvested acreage estimates won’t move much through the remainder of the growing season, which leaves yield as the determining factor for total production. Total corn production is estimated at 14,827 billion bushels. Total soybean production is estimated at 4,693 billion bushels. That’s a lot of grain to store and sell. Some farmers or cooperatives will have a blank space and they will probably use it to pile corn, given the large size of both crops and significant carry over from 2017.
Moving to the demand side, export numbers for soybeans would suggest the there is some bad blood in the water between the United States and China and develops the question “will the U.S. and China ever get back together”. Trade theory would suggest that the U.S. price will either be bid lower on excess supply and weakened demand or the rest of the world price (mainly large exporters like Brazil) will be bid higher on stronger demand for their product until the U.S. price plus the tariff is equal to the Brazilian price. With an additional 25% Chinese tariff on U.S. soybeans, that would mean that the U.S. soybean price will would need to be 80% of the rest of the world price (i.e. Brazil) for the two prices to be substitutable to Chinese buyers. That wedge as of today sits at 83%, meaning that the Brazil price is still not high enough or the U.S. price has not hit it’s floor yet. Sorry for the bad news.
Due to the higher world price, Chinese, Brazilian and European producers are getting the signal to produce more product. Similarly, Chinese consumers are getting the signal to consume less. This creates a decrease in the amount of soybean imports for China, holding everything else constant.
Looking at the May WASDE, which in this case represents the before tariff estimates and the September WADE, which represents post tariff estimates we can draw conclusions about use. Chinese soybean production in the September WASDE is increased from the May WASDE by 6%, and their imports of soybeans are decreased by 9 million metric tons or 8.7%. This follows the logic in the paragraph above.
Time for some good news. As expected, a lower commodity price will spur domestic use. Corn ethanol production is up 50 million metric tons compared to a year ago and finally we are seeing increases in the feed and residual use value- up 125 million bushels from 2017. This value was also increased 50 million bushels from the August report. Exports for the 2018 crop are still down from 2017, but raised from the August report on strong growth in sales to Egypt, Columbia, and Mexico.
Soybean use, shows a 15 million bushel increase in crush- driven by profit margin of soybean oil. Bio-diesel is increased 800 million pounds on the resulting increase in soybean oil. It’s like a peanut butter sandwich- to get a sandwich, one need equal parts of peanut butter and jelly. For soybeans, increased crushing to get more soybean oil also produces more soybean meal. The increase in soybean meal pushes down meal prices and a decrease of $20/ short ton is represented in the WASDE report. Soybean export continue to be stronger than normal right now to countries not named China. This increase in exports is not expected to continue through the remainder of the marketing year. Soybean export estimates have been reduced 70 million bushels compared to a year ago, even with the record crop.
Total soybean use is reduced to 24,200 million bushels and ending stocks are increased to 845 million bushels. For corn, total use is increased to 15,105 million bushels, but not enough to counter the large production, as ending stocks are also increased to 1,774 million bushels.
The markets were expecting corn production around 14.5 billion bushels. The larger than expected corn crop pushed futures prices lower today. December corn futures reached their lowest levels of their existence settling at $3.52/bu. November soybean futures traded sideways as the increase in production was close to expectation. The season marketing average for corn is now projected at $3.50/bu. and for soybeans at $8.60/bu. As a reminder the season marketing period for both corn and soybeans is September 1, 2018- August 31, 2019.
Grain marketing this winter and early spring will be tough for producers, because the low prices are expected to continue. Any talk of a resolution to the trade situation has been a positive sign to markets and one could expect that if resolved could send corn and soybean prices significantly above current futures prices. However, a large South American crop this winter followed by another above trend U.S. crop would possibly send U.S. prices to their lowest levels since the early 2000s. It’s completely their choice, but personally- I’d rather be safe than sorry.